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The paradox of thrift in an inegalitarian neoclassical economy

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  • Mohamed Ben Ridha Mabrouk

Abstract

Schilcht (1975) and Bourguignon (1981) studied the case of a convex saving function in the Stiglitz (1969) model. They have shown that if one of the two proportions of the rich or the poor is below a certain threshold, there is a two-class equilibrium. However, they have only proved the existence of this threshold. We give here a system of equations to calculate this threshold which we interpret as the maximum proportion of rich for having a stable two-class configuration. If the proportion of rich exceeds this threshold, the economy enters a phase of decline although the golden-rule capital has not yet been reached. The mechanism of this decline recalls the description given in Keynes (1936), of the decline which happens when there is too much savings in an inegalitarian context. This is an example of what is known as the "paradox of thrift". It is remarkable that this paradox takes place in a neoclassical setting that does not include key Keynesian elements such as saturation of demand, monetization of savings, short-term effects, expectation problems, involuntary unemployment and rigidities. Numerical simulations are given to illustrate and analyze the mechanisms involved.

Suggested Citation

  • Mohamed Ben Ridha Mabrouk, 2016. "The paradox of thrift in an inegalitarian neoclassical economy," Business and Economic Horizons (BEH), Prague Development Center, vol. 12(3), pages 75-93, September.
    • Handle: RePEc:pdc:jrnbeh:v:12:y:2016:i:3:p:75-93
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    References listed on IDEAS

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    1. Bourguignon, Francois, 1981. "Pareto Superiority of Unegalitarian Equilibria in Stiglitz' Model of Wealth Distribution with Convex Saving Function," Econometrica, Econometric Society, vol. 49(6), pages 1469-1475, November.
    2. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    3. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004. "Do the Rich Save More?," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 397-444, April.
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    Cited by:

    1. Mabrouk, Mohamed, 2017. "Is Rentier Capitalism That Bad? Rent, Efficiency and Inequality Dynamics," MPRA Paper 81565, University Library of Munich, Germany.

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    More about this item

    Keywords

    Paradox of thrift; inequality; saving; growth;
    All these keywords.

    JEL classification:

    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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